Starwood Gains On Upgrade

J.P. Morgan says the strong performance of large city-center operations will expand margins.

Starwood ( HOT) shares rallied 2.1% after J.P. Morgan upgraded the hotel and resorts company to outperform from neutral, while raising 2004 and 2005 guidance above Wall Street's current consensus.

Citing strong margin growth, analyst Harry Curtis boosted his fiscal 2004 earnings per share estimate to $1.22, implying 41.9% growth from Starwood's 2003 EPS of 86 cents and a premium to current Wall Street consensus of $1.10. Shares rose 80 cents to $39.25 near a 52-week high in early morning trading on Wednesday.

"Now that large city center assets are outperforming, margins should begin to expand. In the near term, however, the expansion will be partly constrained by higher costs," said Curtis. "Since EPS is more sensitive to a point of margin growth than a point of revenue per available room growth, we believe there is upside to earnings, as Starwood continues to focus on cost reduction."

Margins aren't rising only because of strong demand in urban hotels, Starwood is piggybacking on the business travel recovery, with group bookings up 5% to 6% year over year in recent months. Indeed, while Curtis expects 2004 results to be strong, his 2005 EPS targets are even stronger, the most aggressive on Wall Street, set at $1.65, way above current consensus of $1.36.

Revpar, revenue per available room, is also expected to rise, something that could lead to strong first-quarter results. In Curtis' view, Starwood's revpar growth for the first quarter will come in near 7%, ahead of current expectations of 5% to 6%. Current first-quarter trends are strong, with January revpar up 6%, followed by a 6.6% gain in February. And March results are expected to follow suit, with easy comparisons due to the war in Iraq last year.

And while comparisons will be more challenging as the year wears on, Curtis expects Starwood's revpar growth to continue near 6% throughout 2004, as the company leverages luxury hotels in urban areas. As Smith notes, Starwood generated nearly a quarter of 2003 earnings before interest taxation depreciation and amortization from its New York, Phoenix and Atlanta operations-- three markets that are seeing revpar gains that are higher than the national average.

"If history repeats itself, then revpar performance in New York should be the beginning of a trend in increased revpar growth in a greater number of city center hotels," said Curtis.